US GDP (Q4 2024 — second estimate)

The economy looks good in the rearview mirror

• Real GDP growth was left unrevised at 2.3% annualized in Q4, after an impressive 3.1% expansion in Q3. The main takeaway from this report is that domestic demand retained solid momentum heading into 2025, with real final sales up 3% annualized. Still, the latest economic data on the labor market, the housing sector, and retail spending trends point to softening economic momentum at the start of the year.
  
  
  • Consumer spending grew an impressive 4.2% in Q4 — in line with the prior estimate — following a robust 3.7% surge in Q3. Consumers stocked up on durable goods (cars, recreational goods and vehicles, and furniture) and spent freely on clothing, recreational services, dining out and stays away from home. 
    
    
  • Business investment growth was revised lower, from minus 2.2% to minus 3.2% annualized — a notable pullback in that it represented the largest decline in business investment since 2004 outside of recessions. Equipment investment was the main culprit, plunging 9% on a severe investment decline in industrial and transportation equipment and a sharp contraction in computers and peripheral equipment. Investment in intellectual property products was also revised lower to show no growth in Q4, reflecting a contraction in research and development (R&D) investment. 
    
    
  • Residential investment rebounded 5.4% in Q4 following a 4.3% contraction in Q3. While the worst of the housing sector correction is behind us, historically low affordability will cap residential investment growth in the coming quarters. Construction activity is still likely to benefit from an undersupplied housing market, but labor constraints from reduced immigration could restrain activity and pressure costs.
    
    
  • Slower inventory accumulation led to a substantial 0.8-percentage-point (ppt) drag on real GDP growth, slightly less than the 0.9ppt drag previously estimated.
    
    
  • Net trade made a small but positive 0.1ppt contribution to GDP growth in Q4, as exports fell 0.5%; imports also fell, by 1.2%. 
    
    
  • Government spending growth was revised higher to 2.9% — adding 0.5ppt to GDP growth — with federal spending up 4% and state and local outlays growing at a healthy 2.2% pace.

• On the inflation front, price pressures firmed slightly more than initially reported in Q4, with headline inflation rising 0.2ppt to 2.5% year over year (y/y) and core personal consumption expenditures (PCE) inflation rising 0.1pt to 2.8% y/y. Near-term economic fundamentals remain disinflationary, including more prudent consumer spending, reduced business pricing power, easing housing cost inflation, and non-inflationary labor conditions. Yet, major shifts in US trade and immigration policies mean the risks to inflation are tilted to the upside.
  
  
• Despite rising concerns about the health of the economy, momentum continues, but increasing uncertainty surrounding trade, fiscal and regulatory policy is casting a shadow over the outlook. We project that the economy will expand by 2.3% in 2025, with GDP growth momentum tapering in the second half of the year, and we predict an average growth rate of 1.7% in 2026. Consumer spending is expected to advance at a more measured pace this year as businesses continue managing their workforce strategically. 
  
  
• With inflation coming in hotter than expected in January and labor market conditions generally solid, we believe a reactive Fed will maintain a wait-and-see approach over the coming months, and we expect only two Fed rate cuts in 2025: in June and December. And the risk is tilted toward less easing if the administration’s policy mix fuels higher inflation and inflation expectations.